California Issues New Tax Clarification on Single Member Nevada/Delaware/Wyoming LLCs

In January, California’s tough new nexus standard came into effect. One of the areas that it has impacted is the ability of California residents to use disregarded, flow-through LLCs that are incorporated out of state, as a way to avoid paying California’s $800 privilege tax on entities.

In California, all incorporated businesses (LLCs, LPs and Corporations) are required to pay a yearly franchise tax. There’s a base fee of $800/year, and it goes up after that, depending on the type of entity and the amount of income the entity made in the previous year. The tax is payable whether or not the entity made any profit, and whether or not it was active, making CA an expensive state for business structures.

Owners of single member LLCs, that were disregarded for tax purposes (i.e., report income and expenses on Schedule C or E to your personal return) have often sidestepped this requirement, by using an LLC set up outside the state. Because there is no separate LLC return, and all income/expenses are being properly reported on your personal California return, the FTB generally went along with it.

However, in a recent legal ruling, the FTB has now taken a new position. Under California’s new economic presence nexus laws, nexus is created when:

  • The managing owner/member of the entity is a California resident, even if the entity has no business activities in the state and generates NO California-sourced income; or
  • The entity is doing business in California, even if the owners live out-of-state;

If the entity is held by you personally, California now wants you to register that entity into the state, and begin paying the $800/year minimum franchise tax. If the entity is a subsidiary of another out-of-state entity, California wants you to register both the subsidiary AND the parent company for taxes, and pay the $800/year minimum franchise tax on BOTH entities.

The registration process into California isn’t especially difficult, but it will add costs for non-state residents, in terms of a new Resident Agent, plus the filing fees payable to the Secretary of State. If you need help, we’re available to help you take care of all registration requirements for a simplified, low fee.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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